The Welsh Government is expected to complete its acquisition of Cardiff Airport next month in a deal understood to be around £50m with current owner Abertis.

The Welsh Government is expected to complete its acquisition of Cardiff Airport next month in a deal understood to be around £50m with current owner Abertis
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A due diligence process is being undertaken by a team of advisers on behalf of the Welsh Government that includes law firm Eversheds and professional advisory firm KPMG – using personnel at the firms’ respective Cardiff offices.

It is understood that it will be a straight cash deal, with no earn-outs for listed Spanish infrastructure group Abertis.

Earn out clauses could have seen Abertis being entitled, for example, to payments based on the future performance of the airport – such as reaching an annual passenger number of three million a year (it is currently languishing at around one million).

In the short to medium term the Welsh Government would need to inject about £6m a year in capital expenditure and airline route development support – including agreeing to underwrite any losses in the first few years accrued by airlines establishing new routes out of Cardiff.

It is understood that representatives of the Welsh Government have already sounded out a number of low cost airlines over setting up operations at the airport post deal, including Ryanair.

However, Ryanair’s wish list of support is understood to have been too high for the Welsh Government – although discussions are continuing.

It is unlikely that the airport, post deal, would be an asset directly owned by the Welsh Government. It has been looking at establishing a special purpose vehicle to acquire the asset.

However, one option could be for it for it to come under the ownership of the Welsh Government’s banking subsidiary Finance Wales.

Such a move could potentially provide a financial bonus in that its enterprise value on Finance Wales’ balance sheet, could offset what was originally £97m charged to the Welsh Government’s accounts as result of its [Finance Wales’] £150m Jeremie Fund – which includes £75m of repayable finance with interest with the European Investment Bank.

The Treasury ruled back in 2010 that the non EU structural funding element to the fund should be seen as part of the Welsh Government’s block grant and not, as was anticipated by Finance Wales and the Welsh Government, additional to it.

As a result the amount was charged against the capital budget of the Department for Business, Enterprise, Technology and Science (Bets).

The published Welsh Government accounts for its last financial year show that Finance Wales borrowings had reduced to £73.9m. Further repayments of £15.5m are planned for 2012-13 as reflected in the second supplementary budget for this financial year.

If Cardiff Airport appeared on the balance sheet of Finance Wales, could its enterprise value effectively release all or part of the charge of £73.9m – which will be less than £60m at year end at the end of next month – from the capital budget?

With some 40 acres of land around the airport its enterprise value over time should be significantly higher than the amount it pays Abertis.

However, it would need Treasury approval. The Welsh Government and Finance Wales had unsuccessfully argued that the funding should not ever have been allocated as a charge on the Welsh Government’s balance sheet as the money was only intended to be lent to be invested in businesses, for which there is an element of security. It is unlikely that the Treasury would take a favourable view now on the enterprise value of the airport of the balance sheet of Finance Wales offsetting the charge allocated to the capital budget of BETS.

It could also argue that as Finance Wales is a wholly- owned subsidiary of the Welsh Government it would therefore have ultimate ownership of the airport.

Moreover, the Welsh Government has enough financial fire-power to use money from exiting funding resources – including making use of the £227m capital consequential as a result of George Osborne’s Autumn Statement – to pay for the airport.

A Welsh Government spokesman said: “The Welsh Government has appointed a core team of specialist advisers and contractors, which includes KPMG and Eversheds, to assist us through the period of due diligence. As we have said repeatedly, it would not be appropriate to make any further comments on the proposed purchase while we undertake that due diligence work.”

Having acquired the airport, the Welsh Government would put out to tender a contract for a company to run the airport.

This could potentially see the operator – having committed to capital investment at the airport – taking a minority equity stake in a public-private partnership ownership arrangement with the Welsh Government.

Cardiff Airport first moved into the private sector when it was acquired by TBI from the local authorities of West, Mid and South Glamorgan in 1995 for £37.65m.

TBI sold Cardiff, along with its other airports owned and managed in its portfolio – including Belfast and Luton – in a just over £750m deal with Abertis in 2004, of which £553m was in cash and the rest in debt.

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